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Upfront: Sutter punched
MHD numbers a glass half-full—that is if Sutter doesn't steal the glass...

by Peter Seidman

The question raised in a recent Marin grand jury report about whether Marin General Hospital can remain a financially viable facility without the cover of the Sutter Health system has been answered.

But the answer, as often happens, raises many more questions—about the future of the hospital and about its association with Sutter Health.

Last week, Sutter revealed financial data that shows the not-for-profit healthcare corporation withdrew about $49 million in "excess revenue" from Marin General Hospital in 2008. Don't call it profit because Sutter is a nonprofit entity. Nevertheless, Marin General Hospital yielded that $49 million, which left Marin and went into the Sutter system.

News about the "excess cash transfer" went public at a meeting of the Lease and Building Committee of the Marin Healthcare District (MHD). Committee members knew in Feb. that Sutter had extracted about $25 million from Marin General in 2008, but were prohibited from making it public under rules that govern the transfer of the hospital from Sutter control to the healthcare district.

Beyond the $25 million, however, Sutter revealed that it had also taken about $24 million in excess operating revenue and used to it replenish a sagging pension fund. Under a 2006 transfer agreement, Sutter is obligated to turn over the hospital no later than June 29, 2010, with a fully funded pension program. Sutter already had replenished the pension fund to the tune of $500 million. Sutter has not been immune to the financial meltdown, and its pension fund investments took a big hit.

"I was shocked," says Jennifer Rienks, healthcare district board member and head of the Lease and Building Committee. "I had known that they took that $25 million a while ago, but that other $24 million was a real shock. They took twice as much as I thought they had taken."

The $49 million withdrawal came just a year after Sutter took about $39 million of excess cash. MHD has leased the hospital to Sutter since 1995. During that time, at least until 2007, the healthcare corporation transferred a total of $39.5 million. Critics of the arrangement with Sutter have been wondering if the corporation has stepped up its withdrawal of excess funds at the hospital with an eye toward the date when Sutter leaves—and begins competing with Marin General. Sutter already has Novato Community Hospital and an urgent care facility in Terra Linda. The company has bought property in the Marin Square shopping center in San Rafael. That could be the site of a new facility that would chip away at some of that Marin General excess cash revenue after the transfer. That's speculation because Sutter, as is the company's bent, is remaining quiet about its intentions.

The revelation of the $49 million in excess revenue at Marin General in 2008 is a glass half-full. The figure, along with the 2007 withdrawal, shows that Marin General can survive on its own post-Sutter. But the withdrawals also point to a glass half-empty. When Sutter leaves, it will have taken an amount of cash that could have paid almost one-third of the construction costs to build a new wing, which would satisfy state seismic-upgrade requirements.

And there's another glass, but it's secret.

The financial admission from Sutter came as part of a tightly structured timetable leading to next year's transition. Sutter critics are voicing concern about the company's financial intentions in the next year.

Sutter says it's meeting the letter of the transfer agreement and will leave the hospital in sound financial shape—one of the transfer agreement requirements. But meeting the agreement requirements doesn't mean revealing excess information. That was evident in the financial disclosure for 2008. "For me, one of the most astonishing things is that when you look at cash left in the hospital [for 2008], there's no figure," says Rienks. "There's no figure on that line, just a dash." Rienks says Sutter is supposed to ensure "a minimum of 14 days worth of operating capital in the hospital" as required by "Sutter's own excess cash transfer agreement."

Lease and Building Committee members asked a Sutter representative at their meeting about the dash instead of a dollar entry on the operating capital line. As has happened in the past, says Rienks, the representative "jotted down our questions, but he very rarely has answers." Sutter will get back to the committee with the answer, was the response.

That lack of transparency, along with a recalcitrant attitude on the part of Sutter, has angered the hospital corporation's critics, many of whom have been fighting Sutter since 1995. Ten years earlier, the world of community hospitals was in disarray, and MHD hired Hank Buhrmann, who had a reputation as a shrewd top manager, as its new CEO. After taking up his new post, Buhrmann proposed that MHD lease the hospital to a new entity, the Marin General Hospital Corporation, which Buhrmann created with the help of attorney Anthony Cook, whom Buhrmann had brought along as attorney for MHD. The healthcare district board voted to lease the hospital to Buhrmann's new entity, which had its own corporate board, separate from the elected healthcare district board.

While the district board conducted business in the open, the corporate board could act behind closed doors and run the day-to-day operations at the hospital. The arrangement was necessary to conduct business in an increasingly competitive environment, say supporters. The district board's public meetings were often tied up in battles over the nature of the lease agreement and the ability of the corporate board to act in secret. Skip to 1995, and the Marin General Hospital Corporation was an affiliate of California Healthcare Systems. That's when Sutter came on the scene. And through a merger, the hospital corporation came under the control of Sutter, which assumed the hospital's lease. Sutter operates 26 hospitals in California and reported a net income of $186 million in 2008. Although that number was down from the previous year, no one thinks Sutter is on unsound financial ground.

When Sutter came to Marin it found a sick hospital, says Sharon Jackson, a healthcare district board member. "Sutter took a failing hospital, heavily indebted, losing money, paid off all the bonds and fixed up the facility. But I think the main thing they did was infuse capital." Most of the medical staff has remained unchanged, she says. That means the change from a financially sick hospital to one that Sutter can withdraw tens of millions in excess revenue out of came from financial resources Sutter provided.

When Marin General no longer can dip into those resources, it still will have operating revenue, but not in the amounts that Sutter has tallied, says Jackson. "That would be naive." Even with a reduced amount of excess revenue, it seems the figures now on the table point to a Marin General Hospital that can remain viable after Sutter—which offers comfort to many who have been concerned that the hospital might collapse without Sutter support. It also should provide comfort to the Marin Board of Supervisors, which loaned MHD $20 million to help with transition costs.

Jackson notes that the excess revenue Sutter has taken and infused into its healthcare system is reasonable and rational, the way healthcare systems should work. But critics say Sutter is siphoning money that should stay within the county. Sutter invested in Marin General, says Jackson, and the investment made returns, and the corporation has every right to reap the rewards of its investment.

Although the picture looks promising for a stand-alone Marin General, it's still a little blurry because Sutter has yet to reveal the full financial picture at the hospital. During the period that extends to the transition date, the district board will be entitled to an increasing amount of hard financial facts.

That's not especially comforting to Larry Bedard, chairman of the district board. "Personally, one of the most interesting revelations or recognitions on my part since the grand jury report is that there are three parties to the settlement [that defines the transition from Sutter]. I thought the parties were simply Sutter and the healthcare district." In fact, says Bedard, the Marin General Hospital Corporation is "a separate signatory on the agreement, and they have their own roles and responsibilities."

What makes Bedard and others wary is that two members of the corporation's board are Sutter employees and others receive compensation from Sutter. Bedard says the arrangement carries the potential for a conflict of interest during the transition from Sutter. Although members of the corporate board include dedicated members of the Marin community with no Sutter affiliation, the members with a Sutter connection raise the question: Is the corporate board acting in the best interests of Sutter or the community?

Jackson says attacks on Sutter during the long battle since the corporation came to Marin have tended to bind the corporate board "because attacks on Sutter were seen as attacks on the hospital." The more strenuous the attack, the tighter the corporate board drew the wagons.

Details of the corporate board's actions are difficult to determine—even for members of the district's public board. Rienks, Bedard and Jackson all say the true relationship among Sutter and the corporate board and the district board is unknown and requires investigation.

Bedard is calling for the grand jury to continue its investigation. "The grand jury and others, including members of the public, should ask what's in the best interests of the community. I think the way the current Marin General Hospital Corporation board is set up is a clear conflict of interest."

The healthcare district's elected board has no power to force the corporation to take any action. But the corporation's board could act on behalf of district residents, and the hospital, says Bedard.

For example, most hospitals have a funded depreciation account. Money gets set aside to buy new equipment and other necessities. When Marin General joined the Sutter system, Bedard says, about $830 million in funded depreciation existed for hospitals in the Sutter system. But all that money is on the books for hospitals in the system other than Marin General. Bedard says the Marin General Hospital funded depreciation account "is zero."

The board of the hospital corporation could remedy that situation and assume some level of control over how much money Sutter extricates from Marin General in the next year. Bedard says the corporate board could pass a resolution to put money in a funded depreciation account, which would in effect protect that money for the transition.

Jackson says the hazy arrangement between the corporate board and Sutter (and the district) poses a problem in making sound assumptions. But, she adds, the corporate board—and the public board—would be reasonable to push every legal avenue to seek a funded depreciation account.

"There's a lot more we have to look into," adds Rienks.

Contact the writer at peter@pseidman.com

Posted by Editor, Pacific Sun Online, a resident of the San Rafael neighborhood, on Jul 20, 2009 at 4:34 pm

Assembly Member Jared Huffman is asking the board of Marin General Hospital to explain large transfers of funds from Marin General to the Sutter Health system. The text of his letter follows along with his news release, in which he is quoted as saying “If the board is not able to justify these transfers, I will be calling for a full investigation by the State Attorney General’s office.”

LETTER:

Members, Marin General Hospital Board of Directors

Frank Travel, MD, Chair

Robert Heller, Vice Chair

Jim Dietz, MD, Secretary

David Bradley

Jeanne Austrian

Charles Lee

Edward Berdick

Patrick Bennett, MD

Bruce Hart

David Galland, MD

Gerald Wilner, MD

Matthew Taddei

250 Bon Air Road

Greenbrae CA 94904

Dear Board Members:

I am writing in response to recent newspaper accounts that “excess” cash of $38.7 million in 2007 and $48 million in 2008 have been transferred from Marin General Hospital (MGH) to other hospitals in

the Sutter system. Given the challenges facing MGH in the years ahead, including the transition to local control in June 2010 and looming deadlines for costly seismic safety improvements, it is hard to imagine that there could be any “excess” funds at MGH, much less the $86.7 million Sutter has recently transferred. While Sutter obviously benefits from these transfers, my constituents do not.

Taxpayers in the Marin Healthcare District will have to replace these funds, and residents who depend on MGH as a critical element of Marin County’s healthcare system will bear the impact of an underfunded MGH.

It is my understanding that assuring high quality medical care and the fiscal integrity of the hospital are core responsibilities of the MGH Board of Directors. With those obligations in mind, I respectfully request that you explain the basis for allowing these large transfers of money out of MGH to other Sutter hospitals. I also ask that you assert your authority to stop any additional transfers of

these “excess” funds until the situation has been fully investigated, and it is clear that such transfers are both lawful and in the best interests of MGH and its patients. Moreover, should it be determined

that these transfers of “excess” funds were not in the best interests of MGH and its patients, please be assured that I—and I suspect many others—will expect you to do everything within your power to secure the return of the transferred funds.

Finally, I ask that you provide my office with all documents that relate to the MGH Board’s role in reviewing, commenting upon, advising or approving these transfers, including but not limited to

minutes and other documentation of Board meetings where the subject of transfers of “excess” funds was discussed or voted upon.

Thank you for your cooperation and assistance on this important matter. As fellow residents of Marin, I am sure that you share my belief that a financially strong Marin General Hospital is vital to providing quality patient care to our mutual constituents—the people of Marin.

Very truly yours,

JARED HUFFMAN

Chair, Assembly Water, Parks & Wildlife Committee

NEWS RELEASE:

San Rafael, CA – Troubled by reports that Sutter Health has transferred millions of dollars out of Marin General Hospital, Assemblymember Jared Huffman (D-San Rafael) is demanding answers from the Marin General Hospital Board of Directors. Marin General Hospital is currently operated under lease by Sutter Health, but under a transfer agreement reached in 2006, the hospital will transition back to Marin Healthcare District control in 2010. Transfers of funds out of the hospital showed a significant increase after 2006.

According to hospital financial statements, $38.7 million was transferred from Marin General Hospital in 2007, followed by another transfer of $49 million in 2008. These funds have been dispersed to other hospitals in the Sutter system. In fact, since 1995, a total of $118 million has been transferred out of Marin General.

In his letter, dated July 20, 2009, Huffman calls upon the board of directors to explain these transactions.

“It gives the impression that they’re draining funds in anticipation of leaving,” says Huffman.

“This is money that the hospital generates that should be allocated for meeting the needs of the hospital and the local community, not transferred to other assets held by Sutter.”

Marin General Hospital will face significant challenges in the years ahead. Rebuilding some of the facilities to meet seismic safety standards will cost an estimated $350 million. “The money that has already been transferred out of the hospital could have paid one-third of the cost of rebuilding,” noted Huffman.

“Marin residents are going to be asked to approve a public bond to pay for those necessary upgrades to our hospital, and every dollar Sutter takes out of Marin General, means another dollar that taxpayers will have to pay.”

Huffman expects the Marin General Hospital Board of Directors to explain these transfers, and specifically how these actions are in the best interest of the hospital and the residents of Marin

County that they serve. “If the board is not able to justify these transfers, I will be calling for a full investigation by the StaTe Attorney General’s office.”

Posted by Health Care Consumer, a resident of the San Rafael neighborhood, on Jul 21, 2009 at 9:21 am

When I read this story, it occurred to me that boards usually have some fiduciary duty to the entity they oversee. If the board approved the transfers to Sutter, it will be interesting to hear an explanation of how they argue that the transfers of millions of dollars benefit the hospital at this time. I'm glad someone is doing something to look into this.

Posted by Lori, a resident of the Mill Valley neighborhood, on Aug 3, 2009 at 1:10 pm

Last year Dick Spotwood wrote an IJ editorial about Sutter transferring $38M of Marin General’s 2007 profits to Sutter’s “central” bank account in Sacramento. Spotswood sarcastically wrote that “a huge sucking sound” was heard during the transfer of cash. Now we learn the 2008 “take” was even greater.

The IJ then gave Robert Heller (Chair of Sutter’s Board at Marin General) a chance to write a column which defended Sutter’s actions . Heller wrote that Sutter has spent $130M on capital improvements over the years. But he didn’t mention that these capital epxenditures were expected to be made in lieu of Sutter paying any substantial “rent” to the District. In exchange for paying low rent on their lease, Sutter was suppposed to spend considerable sums (from the hospital profits) on capital improvements so the hospital would be improved, maintained and not degraded over the years.

The lease required that Sutter provide quarterly reports to the District of the capital expenditures. Sutter’s reports were indeciperable containing codes and abbreviated designations with no “key” to explain what the expenditures were for. Then, around 2004, Sutter began saying it had fulfilled its obligation re: all capital expenditures per the lease and they didn’t intend to make any more. Around that time, they also disavowed any obligation for the multi-million dollar seismic repair work required per State law despite the fact that their lease obligated them to maintain the facility in accordance with these laws. Sutter would not budge knowing the District was cash poor and could never outlitigate Sutter from a financial standpoint.

In 2005, the District found out that millions of dollars of capital expenditures went to questionable items like custom computer software worth zero dollars to the hospital without Sutter’s IT systems in place. And even though capital expenditures (intended to maintain and improve the hospital) were made for these IT systems, Sutter now claims the system is “proprietary.” The hospital’s IT system must now be completely replaced at a cost of $67 million to the District.

It now appears that the lease should never have allowed Sutter to pay low rent and have such a high degree of control over the spending of funds for the hospital’s capital improvements. The District should have made Sutter pay higher rent and then contracted out facility maintenance and planning and implementation of key improvements to the hospital (as a landlord often does to his building) thereby keeping control over the process. With this arrangement, the District could have also set aside rent sums received from Sutter for major future improvements.

Sutter’s improvements such as the new birthing center, and equipment for people with cancer and heart problems explain how some of the money was spent, but the more basic repairs needed in critical areas of the hospital were ignored. The hospital’s infrastructure is crumbling from age and band-aid repairs according to the 2004-2005 structrual engineers’ reports. The reports found key areas are unsafe in an earthquake , such as labor and delivery rooms, where unbraced pipes in the ceilings are likely to fall down.

When Heller discusses the hospital’s finances, he cites the losses (in 3 years since 1996) at $21M, but there is no mention of the other 9 years profits, estimated at over $150M. The $38M figure (from 2007) is probably even higher...but we can’t really know because Sutter started ignoring their lease requirement to conduct a stand-alone financial audit of Marin General in 2005. Since then, they have only agreed to give the District a composite audit of all Sutter facilities meaning the District and public have no stand-alone audited financials for the hospital since 2005.

Sutter’s refusal to perform a stand alone audit of Marin Generals’ finances and their decade-long refusal to cooperate in providing information to the Distrct may now reach a crisis point since the District now desperately needs accruate financials on the hospital to deal with the impending separation from Sutter--for budgeting, planning and most importantly, to get commitments from lenders.

Heller’s editorial laid out the supposed benefits of being part of Sutter’s central reserve system all these years. He explains that to enjoy the benefits of being part of Sutter’s system, you have to expect a transfer of local monies to Sacramento from time to time. He says Sutter’s “strong central reserve” (like a “Big Daddy”) is there to fund large capital improvements and help the hospital get through the “tough times.” But remember, Sutter’s rent was set low precisely so the profits could be used as capital to fund large projects. Instead, MGH profits have been used to fund improvements at other Sutter affiliates (those with long-term profit potential) while much needed improvements at MGH have been ignored.

Sutter’s central system has operated like a Ponzi scheme for MGH. The SF Business Journal states that Sutter’s “invesment accounts” lost millions in the recent bust, yet in July 2009, Sutter’s spokesperson told the Santa Rosa Press Democrat “We have $125M “burning a hole in our pocket” for construction of a new facility near the Wells Fargo Center in Santa Rosa. Millions of MGH profits will end up being used to further Sutter’s market share in Santa Rosa it now appears.

Heller’s column also tried to rewrite history describing Sutter’s proposal 3 years ago to build a new hospital for“free.” The offer was a way for Sutter to reconcile their lease-required obligation to do the seismic repairs while simultaneously guaranteeing 30 more years of profit at MGH with no public oversight. At current profit levels, Sutter would earn over a billion dollars in the next 30 years at MGH. $1B minus $300M (estimated cost for the new hospital) equals $700M profit. Sutter’s offer stipulated they would spend the money to build a new hospital but only if the elected District board surrendered its oversight and was all but eliminated for 30 years or more. When the District could not agree to these terms, the offer disappeared. Sutter then asked for a “consensus building effort” but then abruptly sued the District right in the middle of the process.

Secret settlement talks were soon taking place and resulted in a legal agreement (actually a renegotiated lease) with Sutter being let off the hook for all the repairs and past claims by the District. The agreement also called for Sutter to terminate their lease 5 years early (in 2010).

Marin Healthcare District board members in particular, Sharon Jackson and John Severinghaus, the District's Walnut Creek lawyers, Colin Coffey/Doug Strauss and the IJ’s editors all supported the process of closed door negotiations between the District and Sutter that resulted in the legal agreement that laid the foundation for all the problems now happening.

1. The deal allowed Sutter to continue making these multi-million dollar transfers without setting aside an adequate amount of money for the District to be able to continue the operation of the hospital past 2010.

2. The deal released Sutter from its lease obligation to perform State-mandated earthquake repairs which the District (through loans or bonds) must now pay for (estimated cost of $400 million or more).

3. The deal surrendered the District’s ability to access the hospital premises (except for limited entry) thereby depriving the District and its consultants the ability to move forward on seismic repair plans. Jared Huffman’s current bill being lobbied in Sacramento (by Huffman and a paid County lobbyist) asks the State for extension of the 2013 seismic deadline to 2015. The bill states extra time is needed to meet the seismic deadline because Sutter has denied the District access to the premises. But it was the Marin Healthcare board and its attorneys who agreed to the limited access when they signed the settlement agreement. Board member Sharon Jackson and the others (except for Ramirez) on the board knew the access to the premises would be severely limited but voted for the deal nonetheless.

4. The deal released Sutter from all claims by the hospital/District for Sutter’s questionable use of capital expenditure funds for IT (computers/info tech.).

The result of the poorly negotiated 2006 settlement is that the District is left with hundreds of millions of dollars in liabilities for seismic repairs, building improvements (due to minimal maintenance of the facility by Sutter), IT and other critical operating expenses.

I was the only candidate (out of 8) in the 2006 election to the healthcare district board who opposed these terms and warned of these consequences.

But the other thing about the settlement agreement that no one is talking about (or the IJ writing about) is how the agreement allows the District board, its attorneys and Sutter’s reps to meet secretly with Judge Dufficy to iron out any “problems” with the implementation of the transfer (such as the finances, IT issues, access issues, transfer of funds, etc.). Since 2006, the public and voters have had no way of knowing what has been happening in closed sessions and behind Judge Dufficy’s doors which is a true perversion of our open government system, Brown Act, etc.

Posted by Linda Remy, a resident of the Belvedere neighborhood, on Aug 3, 2009 at 4:42 pm

In 1996, I was so concerned about the excess cash transfer program and the obligated group. which was required for MGH to have the "privilege" of joining Sutter, I sued to stop it.

Many hospitals in the Sutter System -- Alta Bates, for example -- were not required to participate. Why MGH? Because MGH has always been a cash cow.

In my naivete, I thought the suit would stop the merger. Certainly was disabused of that fantasy.

When I was elected to the District Board, I was told I should give up that suit, because we would now have the votes to stop it.

Certainly learned that was not true. Certainly regret not continuing that suit.

After I became a District Director, I brought to light all the egregious quality of care violations under Sutter's management. I was villified for saying truth. Doctors cursed me at meetings. After I left office, I toured the county with a 20-foot long MGH Wall of shame, trying to get people to understand what was happening at our publicly owned hospital.

When Directors Severinghaus and Jackson negotiated the appalling lease termination agreement, I took "Trojan Horse" signs to District meetings, warning that gutting of the hospital would happen.

Certainly learned that calling a Trojan Horse a Trojan Horse was ineffective.

The gutting certainly happened and we ain't seen nothing yet.

Lori has written an eloquent summary of how we got here.

Suddenly the "hospital critics" were right all along.

Someday people will understand that there is a good reason for the public to own and manage certain core services. And yes, we do need single payer health care.

By the way, the process of privatization is being repeated now in Novato, where management of a highly valued public asset (read sewage system) is being privatized once again. Can hardly wait to see what will unfold in the coming years.

Posted by Charles Amico, a resident of the Larkspur neighborhood, on Aug 3, 2009 at 6:25 pm

I must remind everyone here that it was Dr. Archie Ramirez who tried to have open hearings and warned everyone not to be fooled by Sutter Health. Time has proven Archie was right all along and deserves the respect of all of us by trying to get us all informed as to the truth.

Posted by Linda Remy, a resident of the Belvedere neighborhood, on Aug 3, 2009 at 6:59 pm

To say the least, Archie was another hero in this fight. He broke the code of silence and paid mightily. Probably the most of all the "critics".